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Has Bed Bath & Beyond Fallen Too Far?

After being hit with news of poor revenue and in-line earnings, shares of Bed Bath & Beyond plummeted. Is now actually the best time to jump into the company's shares or should investors look at Target or Macy's instead?

After the market closed on April 9, shares of Bed Bath & Beyond (NASDAQ:BBBY) fell 6% on news that the company's fourth quarter results were slightly worse than anticipated and that management's expectations for its next quarter is far lower than forecasted. In light of this news, it makes sense for shares to drop. Is it possible though that now more than ever is a prime opportunity to pile into the company?

Bed Bath & Below!During the fourth quarter of its 2013 fiscal year, Bed Bath & Beyond reported revenue of $3.2 billion. This represents a 6% decline compared to the $3.4 billion management reported the same quarter a year earlier and fell almost 1% shy of the $3.22 billion analysts hoped to see.

According to management, the drop in sales is due to an extra week of operations during last year's fourth quarter compared to this year's, partially offset by a rise in store count and improved store metrics. At the end of its fiscal year, the company operated 1,496 retail locations, up almost 2% from the 1,471 stores in place the same time last year. Additionally, Bed Bath & Beyond's comparable store sales rose 1.7% during the quarter.

Source: Bed Bath & Beyond

In terms of revenue, Bed Bath & Beyond fell short. The same cannot be said for the company's profitability during the quarter, however. According to management, earnings per share came in at $1.60. This matched analyst expectations and fell in the upper range of the $1.57 to $1.61 the company anticipated as recently as March. It should be noted though that the company's bottom line was lower than the $1.68 the business saw the same quarter a year earlier.

This drop in profits compared to last year's numbers was mostly due to the company's fall in revenue, but it can also be chalked up to higher costs in relation to sales. For the quarter, the company's cost of revenue rose from 59% of sales to 59.5%, while its selling, general, and administrative expenses notched up from 23.4% of sales to 24%. These negative events were partially offset by a 6.5% drop in the number of shares outstanding because of management's decision to buy back $532 million worth of the company's shares over the quarter.

Can the company handle the heat?Over the past five years, Bed Bath & Beyond has been on fire. Between 2009 and 2013, the company's revenue soared an impressive 47% from $7.8 billion to $11.5 billion. This rise in revenue was driven, in part, by an improvement in the company's comparable store sales over time. It was also attributable to its acquisition of other retailers like World Market and Linen Holdings.

In juxtaposition, both Target (NYSE:TGT) and Macy's (NYSE:M), two of Bed Bath & Beyond's largest rivals, saw their sales rise 11% and 19% from $65.4 billion to $72.6 billion and from $23.5 billion to $27.9 billion, respectively. In the case of Target, the rise in revenue was due to higher comparable store sales over time, but it was also due to higher store count. Macy's also attributed its rise in revenue to a greater number of locations, but with most of its growth due to higher comparable store sales, part of which was driven by its store-within-a-store operations.

In terms of profitability, Bed Bath & Beyond did even better than it did from a revenue perspective, with net income rising 70% from $600 million to $1 billion. On top of benefiting from rising sales, the company saw its selling, general, and administrative expenses fall from 28.5% of sales to 25.7%.

Over this timeframe, Macy's performed even stronger. Between 2009 and 2013, the retailer's net income jumped 352% from $329 million to $1.5 billion. Like Bed Bath & Beyond, Macy's bottom line improvement came from higher revenue and a decline in its selling, general, and administrative expenses, which fell from 34.2% of sales to 30.2%, but there were other factors involved. During the five-year period, the company reduced its debt load from $8.5 billion to $6.7 billion, resulting in a 30% decrease in interest expense per year.

Target hasn't been so lucky. Even though the company's revenue improved at a respectable rate over the past five years, its bottom line fell by 21% from $2.5 billion to about $2 billion. Excluding 2013, the company's revenue actually rose 21%. However, the lower revenue stemming from its data breach, combined with $17 million in expenses relating to it and a 41% jump in interest expenses over the past five years, negatively affected its profitability.

Foolish takeawayBased on the data provided, it looks like Bed Bath & Beyond's quarter was OK but far from great. The business reported a drop in both revenue and profits over the past quarter, but its longer-term performance has been enviable. In spite of fierce competition from its rivals, the company has to compete with e-commerce sites. Still, its operations don't appear to have been hurt to any noticeable extent.

Moving forward, it's difficult to tell if Bed Bath & Beyond can continue its long-term growth trend. For the Foolish investor who believes in management's ability to execute strategies and keep up with the changing landscape of retail, though, the business might offer some attractive prospects.

Author

Dan is a Select Freelance writer for The Motley Fool. He focuses primarily on the Consumer Goods sector but also likes to dive in on interesting topics involving energy, industrials, and macroeconomics!